“Inflation” is a word that often sets off the alarm in the minds of both consumers and businesses!
But is it as bad as it sounds?
Recent events like the global pandemic, disruption in the supply chain, war outbreaks between Russia and Ukraine, etc., have made inflation inevitable. From skyrocketing fuel prices to increased costs of manufacturing & labor, small businesses became the worst victims of rising inflation.
Even though inflation seems to be quite a distress, it’s not always as bad as it seems. As a matter of fact, it carries both positive and negative impacts.
In this blog, we have attempted to throw light on both the negative and positive impacts of inflation on business owners and how businesses combat inflation to build resilience.
So let’s start with understanding some of the negative effects of inflation:
Inflation: The Damaging Impacts
Inflation is a term that often scares business owners & rightly so. The rise in inflation rates gives rise to many challenges for business owners. Here are some of the major challenges faced by business owners due to skyrocketing inflation:
1. Increased Costs:
Inflation leads to an increase in the price of commodities. For businesses, this means an increase in the manufacturing cost, increase in the cost of raw materials, increased overhead costs, transportation costs, etc. This leads to a negative cash flow situation where businesses spend much more than they earn.
2. Reduced Profits:
With the diminished buying power of consumers, the profit margins become thinner & thinner for the businesses. When fewer units are sold, the manufacturing costs become higher than the revenue which makes businesses struggle financially.
3. Irregular Cash Flow:
Inflation has a great impact on a business’ cash flow. Due to the increased costs & reduced purchases, businesses usually find themselves in a pickle in terms of their cash flow. The lack of right anticipation of inflation hinders the growth of businesses by obstructing the path to positive cash flow.
Inflation: The Positive Side
While a high rate of inflation can disrupt markets & economy, moderate inflation is nothing but a sign of a growing economy & improved purchasing power of people. To put this in perspective, let’s imagine a scenario where the employment rate has become better. With more people having a job and stability, their financial status improves and their purchasing power escalates. With an escalated purchasing power, the demand for goods & services increases, and therefore, their price also increases slightly, giving a moderate rise in inflation rates.
Here are some of the positive impacts of a moderate rise in inflation for business:
1. An Opportunity To Adjust/Increase The Prices:
If as a business owner you have been considering reprising your products & services, a mild rise in inflation can just be the opportunity you have been looking for. Consider the rise in your expenses and adjust your selling price accordingly. However, while deciding on price changes, adopt a pricing strategy that best suits your target market.
2. Short-Term Increase In Demand:
Mild inflation can lead to a short-term increase in demand as consumers want to buy before the inflation rates become higher. Given the future uncertainty, consumers start buying goods now rather than paying an even higher price later. This helps businesses to sell more units at the beginning of the inflation and earn a better profit margin to stay afloat when the inflation eventually gets higher.
3. Reduces The Risk Of Deflation:
Deflation is the exact opposite of inflation where prices of goods & commodities fall extensively. During deflation, the circulation of money in the market reduces as people hold their purchases in the hope that prices are going to drop further. Deflation is not at all good for businesses as they are forced to sell their products at reduced prices taking huge losses. When the inflation rate is moderately high about 1.5-2%, this risk of deflation becomes negligible for businesses.
4 Ways To Combat Inflation And Build Resilience
Inflation might seem a tough barrier to overcome, however, the right financial planning & strategy can easily help businesses to combat the evils of inflation. Here are 4 ways businesses can use to combat inflation and build resilience:
1. Accurate Forecasting & Anticipation:
One of the strongest ways to combat inflation can be through accurate forecasting & correct anticipation of inflation. Small business owners using legacy systems, manual processes, and perplexing data find it difficult to rightly anticipate inflation when faced with a sudden hike in prices.
Therefore, adopting technologies like artificial intelligence (AI) and machine learning (ML) can be extremely instrumental for small businesses. By Adopting modern technologies and employing automation, businesses can achieve accuracy while forecasting inflation.
2. Cash Flow Management:
The second most important factor for combatting inflation is small business cash flow management. If you are wondering what cash flow has to do with rising inflation, well you are about to find out.
Your cash position is essential to combat all the changes that occur in an economy. Inflation leads to high costs & lower profit margins therefore, you need to create cash reserves well in advance to keep the company afloat during hard times.
A cash flow management solution like Shootih can be an ideal choice for small businesses to better analyse, predict and manage the cash flow. Automation can work wonders for small businesses that can’t necessarily hire financial advisors and experts to keep track of all their financial activities.
3. Automate Your Processes:
We can’t put enough emphasis on the importance of automation wherever possible. Automation is the future that will assist your employees to minimize the scope of human errors. Automation doesn’t necessarily mean replacing the human workforce with machines & computers, it simply means aiding the performance of your workforce with the help of technology.
Automation can help you streamline your cash flow, predict your expenses and explore investment options to park your excess cash so that you can use it on a rainy day.
4. Invest In Assets That Will Bring In Cash:
Last but not the least, it’s important for businesses to invest in capital bringing assets and investments. Whether you want to purchase new machinery to lower production costs, invest in automation, artificial intelligence or machine learning to reduce errors and optimize processes or simply invest your cash sitting idly in your bank accounts, all of these investments can be fruitful when the inflation rates start rising above the normal level.
A great way to combat inflation is by making your idle business cash work. You might have some access to cash in between various transactions. You can invest your idle cash into liquid, short-term mutual funds to enjoy a substantial return on it.
Mutual funds investment options like overnight funds, ultra-short-term funds, and liquid funds make ideal investment options for businesses looking to generate fair returns by investing their idle cash.
Act Now For Long-Term Gains: Try Shootih
As we have mentioned, automation can assist businesses to better manage their business wealth and prepare them to combat not only rising inflation but also all the unforeseen future financial crises. Shootih is a wealth management tool that helps small businesses efficiently manage their wealth, transactions, cash flow, investments, etc.
If you are a business owner looking to tackle financial challenges, Shootih can help you with each one of them! With Shootih, businesses can:
- Get a 360-degree view of all the investment holdings & gain-tracking.
- Get a real-time view of incoming and outgoing transactions from multiple bank accounts on a single dashboard.
- Easily analyze cash flow month over month to thoroughly understand different cash flow streams.
- Easily analyze your cash flow health and predict future expenses and income.
- Get notified for investing your idle cash in suitable mutual fund investments and much more!
To know more about Shootih, you can check out the website here!
What is a simple definition of inflation?
To put simply inflation refers to a substantial increase in the prices of goods and services over a period of time.
What causes inflation?
Inflation can be caused by various factors like an increase in demand, disruption in the supply chain, government policies, political instabilities like wars (like the present Ukraine-Russia war), economic growth or disruptions, etc.
Is inflation good or bad?
Inflation can be both good and bad. According to finance experts & economists, a moderate rise in the inflation rate up to 2% is good. It indicates that an economy is growing, people are financially stable and demands for goods are increasing.
Any rate higher than the suggested level of 2% by the Federal Reserve is considered harmful to the economy.